Exhibit 1 shows the progression in consensus aggregated US equity market EPS estimates for 2023 (blue) and 2024 (red). Having witnessed sequential downgrading in EPS estimates for several months, a nadir was reached earlier this summer and a tentative recovery is now underway.
Exhibit 1: A modest positive inflection in both 2023 & 2024 EPS forecasts
Source: Wilshire and FactSet.Data as of September 15, 2023
…the bad news - declining stock buybacks mark the end of the financial engineering era
Exhibit 2 shows the quarterly US ex-financials quarterly buyback run rate (grey bars) and the 4-quarter rolling run rate (blue line). This peaked at c.$1tn in Q3 2022, having risen fivefold from the post GFC low in 2009. The current run rate has declined -17% to $830bn. In the post-GFC period corporates had used 'financial engineering' to fund buybacks (leveraging balance sheets via almost zero cost borrowing to repurchase stock to boost their EPS growth profile). This opportunity no longer exists.
With buybacks possibly experiencing a secular decline EPS improvement from here will be much dependent on profitability.
Exhibit 2: US stock buybacks peaked in Q3 2022
Source: Wilshire and FactSet.Data as of September 15, 2023
The key question is whether deteriorating stock buybacks will impact equity returns?
Exhibit 3 Shows the rolling 5- year compound returns for US equities and the 10-year government bond. We highlight the delivery of double-digit equity returns in the post GFC period. This coincided with the fivefold increase in stock buybacks. The market rewarded the boost to EPS delivered via buybacks. A structural decline in the buyback run rate could imply a headwind to EPS growth and therefore the rate of compound returns accruing.
Exhibit 3: The strong post GFC equity returns coincided with the fivefold increase in buybacks
Source: Wilshire and FactSet.Data as of September 15, 2023
